Maintain neutral: System loan growth in February 2015 remained sluggish, up 0.4% on a month-on-month (m-o-m) and 1.3% year-to-date (YTD), was up 8.8% year-on-year (y-o-y). It was not a surprise that February 2015 was a slow month in terms of approvals (-13.2% m-o-m) and disbursement (-16.5% m-o-m) compared with January 2015 due to the Chinese New Year seasonal factor (hence shorter working days). Overall, the annualised loan growth was within our 2015 target of 7.5% (+6.9% growth in household loans and 8.5% in business loans).
The system’s gross impaired loans saw an uptick of 1.1% m-o-m while rising by 1.9% YTD (though y-o-y was 1.4% lower), driven by working capital loans, non-residential property and residential property financing.
We believe that the delay in payments could be due to seasonal factors, and in the meantime, the system gross impaired loan ratio had remained flat m-o-m at 1.67% (while easing from 1.84% in February 2014). At this juncture, we do not expect a sharp deterioration in the banking sector asset quality. The system’s impaired loan-loss cover, which stood at 97.9% in February 2015 (down from 101% in December 2014) could still provide sufficient buffer.
Amid concerns of a macro slowdown, we believe that system loan growth will register a growth rate of 7.5% in 2015 (2014: 8.7%). This is further reinforced by indicators such as loan approvals and disbursements that have been showing a steady decline since the third quarter of 2014.
We maintain our “neutral” rating on the banking sector given a muted earnings outlook going into 2015 — continuous net interest margin pressure, weakening in loan growth, lacklustre capital market activities and concerns about asset quality (corporate loans in particular). For sector exposure, we favour defensive banks such as Public Bank Bhd and Hong Leong Bank Bhd, given their more stringent credit underwriting standards and established franchises in the domestic retail financing markets. — AffinHwang Capital Research, April 1
This article first appeared in The Edge Financial Daily, on April 2, 2015.